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1The Macro-Stability of Swiss WIR-Bank Spending: Balance and Leverage Effects1 (Nov. 28, 2010) James Stodder, Rensselaer Polytechnic Institute, Hartford, CT, USA; stoddj@rpi.edu; (860) 548-7860Abstract: Since 1934 the Swiss Wirtschaftsring (“Economic Circle”) or WIR-Bank, has issued its owncurrency. This WIR-money is used in a highly counter-cyclical fashion: firms are cash-short in arecession, and economize by greater use of WIR. A money-in-the-production-function (MIPF) modelimplies that this new spending arises through the generation of new bank balances, rather than increasedvelocity. This is confirmed with panel data on transactions by industrial sector. WIR balances are morecounter-cyclical for larger firms, and play a role similar to trade credits supplied to smaller customersand distributors. The counter-cyclical multiplier on WIR expenditures is thus highly leveraged. JEL Codes: E51, G21, P13. I. Introduction The Swiss Wirtschaftsring (Cercle Économique) or “Economic Circle,” founded in 1934, isreferred to nowadays as the WIR-bank. Those studying reciprocal payment mechanisms generally referto this as a “social,” “community,” or “complementary” currency. But the WIR is really a centralizedcredit system for multilateral exchange, with no physical currency. In a recent paper, Stodder (2009) showed that from 1948 to 2003, WIR bank transactions werehighly counter-cyclical. This stabilizing effect should be of interest for monetary policy. After all, if asecondary currency can improve dynamic efficiency, then standard monetary policy cannot be optimal.But what is the mechanism of this stabilizing effect? Stodder noted what a Swiss economist (Studer,1998, p. 31) has called the WIR’s “autonomous money creation” and “automatic plus-minus balance ofthe system as a whole.” Stodder (2009) considered the role of bank balances in generating this counter-cyclical pattern of WIR turnover (= balances times velocity), but lacked adequate data on balances fortests. With a new disaggregated data set with data on WIR balances, we can now show that WIRBalances (not Velocity) are the counter-cyclical driver. Data on transactions by industry and type ofbank customer also show that counter-cyclical WIR activity is more pronounced among “Non-Registered” firms. Such non-member firms are free to accept only as much WIR-currency as they wish,1 I would like to thank Stefan Winkler, a statistician for the WIR-Bank, for his generous aid in interpreting the bank’s dataaggregated by sector. Thanks also to the participants in a seminar given at the Centre for European Research in Microfinance(CERMi), University of Brussels, and especially to Bernard Lietaer for several helpful comments.

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2and apparently are most likely to do so when the opportunity for other forms of payment is especiallylow – that is, during recessionary periods. II. The WIR-Bank Exchange System: Reciprocal Trade Credits There are hundreds of alternative-currency examples in existence today, described in theliterature on Local Exchange and Trading Systems, or LETS (Williams, 1996; Greco, 2001; Jayaramanand Oak, 2005; Kichiji and Nishibe, 2008; Gomez, 2008). The Swiss WIR-Bank is the largest suchsystem, with over 70,000 customers throughout the country, mostly firms, limited by WIR by-laws toSmall and Medium Enterprises (SMEs) (Studer, 1998; Stodder, 2009). Founded in 1934 (Studer, 1998, p. 14), the Swiss WIR-Bank or Wirtschaftsring ("EconomicRing") is not only the largest but also the oldest exchange based solely on a private or ‘club’ form ofmoney. The recent finding by Stodder (2009) that WIR activity has been highly countercyclical wasbased on data from 1948 to 2003. Using more recent data does not change that conclusion. Table 2 below (with notation in Table 1) shows the null of no cointegration rejected at 5 and 10percent in the two specifications, so a positive association between WIR Turnover and GDP is relativelystable from 1952 through 2008. Stodder (2009) shows a structural break in the early 1970s, due tochanges in WIR policy. But for our counter-cyclical hypothesis, what is important is the negative andsignificant counter-cyclical sign in the Vector Error Correction portion of the model, on the first lag ofthe first-differenced GDP terms, D(LrGDP(-1)) and D(LrGDPAV2(-1)), (highlighted for convenience).Tests of serial correlation and Granger causality (changes in GDP effecting changes in Turnover) alsoshow encouraging results. Table 1: Notation for Tables 2, 4-7 LrWirTURN(-t) Natural Log of Real WIR TURNOVER, lagged t period(s) LrWirBAL(-t) Natural Log of Real WIR BALANCES, lagged t period(s) LUE(-t) Natural Log of Number of UNEMPLOYED, lagged t period(s) LrGDP(-t) Natural Log of Real GDP, lagged t period(s) LrGDPAV2(-t) Natural Log of Real GDP, Averaged 2 periods, lagged t period(s) Cointegrating_Equation_RES(-1) Residual of the Previous Cointegrating Equation, lagged 1 period D( ) First Difference of any of the previous variables

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5 A note on household versus enterprise membership: The total of WIR Client Enterprises shownabove (60,703) is 81 percent of total for WIR customers that year (74,732), as shown in the annualRapport de Gestion (2005). The remainder will be household memberships (Winkler, 2010). Note that although total Balances of Non-Registered Client Enterprises are about twice those ofRegistered Clients in most industries (except in Retail and Hospitality), the Turnover for both groups isoften quite similar. This is because the Velocity (= Turnover/Balance) at which Balances circulate isalways higher for Registered Clients. This seems to reflect the more active use of WIR reserves amongRegistered Clients. These may have a larger proportion of customers or suppliers who are also WIRmembers. This leaves open the question, however, of how such usage changes in an economic downturn.We shall see that Turnover tends to pick up during a recession for both Non-Registered and RegisteredClients, but that this is driven primarily by the increased Balances of the former. This, we conjecture,represents a form of non-bank credit that larger firms are extending to SME, analogously to the creditextended through trade-credits in the commercial economy as a whole (Nilsen, 2002). All types of goods and services are exchanged for WIR – construction, hotel stays, restaurantmeals, used vehicles, legal services – with offerings posted online and in publications like WIR-Plus(2009). Prices are quoted in both Swiss Francs (SFr) and units of WIR, and often a mix of the two, witha maximum percent of payment accepted in WIR. For ease of comparison, WIR prices aredenominated in the same units as SFr. The WIR-Bank keeps tabs on each customer in terms of heraccount in WIR credits or debits. From the individual’s point of view, an account in WIR is much likean ordinary checking account with clearing balances and limits on how large a negative balance can berun. (WIR-Bank is a registered Swiss bank, and so also provides ordinary banking services in SFr.) The long-term counter-cyclical activity of WIR Turnover is demonstrated by Table 2 above, andthe previous study of Stodder (2009). The present study examines this activity on a sector-by-sector

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6basis, and shows that this counter-cyclical tendency is most pronounced in industrial sectors which arethemselves highly pro-cyclical, such as Construction. Following the argument of Studer (1988) about self-financing trade, WIR-money can be seen asa form of reciprocal trade-credit, an extension of the trade credits widely used between firms (Greco2001, p. 68; Stodder, 2009). In the US, for example, trade credits are commonly given by a seller onterms of “2% 10, net 30,” whereby the buyer gets a 2% discount by repaying within 10 days, with fullsettlement due in 30 days (Nilsen, 2002). The main use of demand deposits for most businesses,according to Clower and Howitt (1996, pp. 26-28), is to clear such trade credits. In a Philadelphia Fed publication, Mitchel Berlin (2003) notes that despite their role as theprinciple form of short-term credit for SMEs, there has been little work on trade credits. Nonetheless,Petersen and Rajan (1994, 1997) find that between 11 and 17 percent of large-firm assets in each of theG7 countries is dedicated to accounts payable, and between 13 and 29 percent of their accountsreceivable – a measure of trade credits. Since accounts receivables exceed accounts payable for mostlarge firms – this is in effect an extension of trade credit. Reciprocally, receiving trade credits is moreimportant for smaller firms, in their role as customers or distributors. Nilsen (2002) finds that use of trade credits is counter-cyclical for small firms, since they aremore likely to be credit-rationed by banks when money is tight, and trade credits are often the only formof credit left to them. This is consistent with the finding of the present paper: Turnover amongRegistered WIR clients – restricted to SME by its constitution (Defila, 1994) – is also highly counter-cyclical. However, we find that Non-Registered WIR clients show an even greater degree of counter-cyclical activity, based largely on balances. Possible reasons for this will be explored. One likely reason, suggested to the author in comments by Bernard Lietaer,2 is that Non-Registered clients, unlike those Registered, are not subject to the organization’s by-laws and obliged toaccept a minimum share of payment (20%) in WIR. Thus they are free to be more flexible in extending2 During discussions at the Microfinance Seminar, Université Libre de Bruxelles, June 2010.

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7the privilege of WIR-settlement to their most favored customers and clients, and to extend more credit inthis form only when it is most needed, during economic downturns. This could explain much of thegreater counter-cyclical variability in Non-Registered accounts, and would perform a role quite similarto that of trade credits. Yet we must note here two crucial differences between ordinary trade credits and WIR-credits.First, unlike an ordinary trade credit payable in Swiss Francs, a payment in WIR is itself final payment.As long as the WIR-Bank functions, a firm getting WIR for its product sold will never see its check“bounce.” Second, the WIR-bank is a system of multilateral, not bilateral exchange. That is, a WIR-creditor’s value is ensured, not by the debtor’s ultimate willingness to settle in cash, but by theimmediate willingness of thousands of other firms and households to accept WIR-money as finalpayment. To repeat Studer’s formulation (1998, p. 32), “every franc of WIR credit automatically andimmediately becomes a franc of WIR payment medium.” Since every WIR-credit is matched by an equal and opposite debit, the system as a whole mustnet to zero. Individual traders will have either positive or negative balances (“overdrafts”), the latter, ineffect, a loan from the WIR-Bank. Short-term overdrafts are interest-free, with limits “individuallyestablished” (Studer, 1998, p. 31). As long as the average value of these limits is maintained, the WIR-Bank can be quite relaxed about variations in its total bank Balances. The system is also highlyflexible: while the individual’s debit position is set by overdraft limits, the absolute value of all creditsand debits is determined only by economic need. The net of this total, meanwhile, is identically zero.3 A second difference with trade credits is that WIR-exchange is centralized, combining thefunctions of a commercial bank and a central bank for its own currency. It will thus have more detailedknowledge of credit conditions in its own currency than either a commercial or a central bank alone. Ofcourse it can still make mistakes, extending too much in overdrafts or in direct loans. Such credit3 This balanced flexibility of an “automatic plus-minus balance of the system as a whole” (Studer 1998, p. 31) is alsoshown in a pedagogical experiment by LETS founder Michael Linton and IT specialist Eric Harris-Braun (2007), available atwww.openmoney.org/letsplay/index.html. In this experiment, balances typically increase in the alternative currency astraders gain confidence in the system and are able to liquidate more of their unsold inventories.

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8"inflation" has occurred in WIR’s history (Defila, 1994; Stutz, 1984; Studer, 1998), but now appearscontained by sensible overdraft limits. The WIR was inspired by the ideas of an early 20th-century German-Argentine economist, SilvioGesell (Defila 1994, Studer 1998) 4. Keynes devoted a section of his General Theory to Gesell, (1936;Chapter 23, Part VI), whom he saw as an “unduly neglected prophet,” anticipating some of his ownideas on why the interest rate might exceed the marginal efficiency of capital.5 Although the intellectuallinkage of Keynesian and Gesellian ideas has received substantial attention (Dillard (1942), Allais(1947), Klein (1980), Gesellian institutions like the WIR-Bank have not.6 Only two economists Studer(1998) and Stodder (2009) seem to have studied its macroeconomic record.III. Some Formalization: Money in the Production Function In Stodder (2009), we formalize the interaction of WIR-money and national currency via a“money in the production function” (MIPF) specification. This is directly analogous to “money in theutility function” (MIUF), and similarly derived by the implicit function theorem. Both MIPF and MIUFare justified by the transactions-cost-saving role money plays, moving the economy closer to itsefficiency frontier. There is a large literature on this idea (Patinkin, 1956; Sidrauski, 1967; Fischer,4 Gesell would have been familiar with trade credits from his decades of international trade experience in BuenosAires. Gesell’s use of the term demurrage was borrowed directly from international shipping, where it denotes a reduction inpayment to compensate for an unscheduled delay in the delivery of goods. Gesell applied a demurrage charge to the holdingof money, with the aim of increasing its velocity. Most trade credits provide discounts for early payment (Nilsen 2002, Berlin 2003), rather than fines for paying late,but the opportunity cost is the same. A form of bank-mediated trade credit particularly common in international trade is thebanker’s acceptance, which allows the exporter to be paid upon embarkation, while the importer does not have to pay untiltaking possession of the goods. Credits from the WIR-bank can be seen to extend the banker’s acceptance principle in time,and from bilateral to multilateral.5 Keynes notes (1936, p. 355) that “Professor Irving Fisher, alone amongst academic economists, has recognised [this]significance,” and makes a prediction that “the future will learn more from the spirit of Gesell than from that of Marx.”6 Gerhard Rösl of the German Bundesbank (2006) does look at strictly Gesellian currencies – with zero interest ratesand explicit holding costs. These explicit holding costs were called demurrage by Gesell, but Rösl uses the termSchwundgeld, or ‘melting currency’. Such currencies have grown in popularity in low inflation environments like the currentEuro area (as Rösl documents), and in deflationary environments like Argentina in the late 1990s or the US in the 1930s.Rösl’s criticisms of demurrage do not apply to the Swiss WIR, however, since (a) the WIR stopped charging demurrage in1948, and (b) has long charged interest on large overdrafts and commercial loans (based on one’s credit history), (Studer1998, pp. 16, 31). (Interestingly, Rösl uses a “money in the production function” (MIPF) model, as in the current paper.)

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91974, 1979; Short, 1979; Finnerty, 1980; Feenstra, 1986; Hasan and Mahmud, 1993; Handa, 2000; Rösl,2006). We formalize the basic result by showing a profit-maximizing firm as minimizing both its directand transactional costs subject to the constraint of producing quantity, Q , exogenously determined bythe market: Min: cpKp + csKs + rpmp + rsms (1) s.t.: Q = Q p + Qs ≤ f(Kp, mp, Ks, ms) = fp[( K p , K s ), mp] + fs[( K p , K s ), ms].Here the primary national and secondary social currency, mp and ms, show interest rates/opportunitycosts of rp and rs, are used to pay the market costs, cp and cs, of purchasing the required inputs, Kp andKs, respectively. Capital inputs are considered divisible, since in practice goods and services are oftenposted as available for purchase at a mix of WIR and SFr, usually at least 30% in the former. In theproduction/transaction functions Q p = fp[( K p , K s ), mp] and Qs = fs[( K p , K s ), ms], the bars indicate thatthe output quanties Q p and Qs are set exogenously, while the input quantities K p and K s are setseparately, in the sense that K s is not a variable within fp[ ], nor is K p within fs[ ]. The Marginal Rates ofSubstitution (MRS) derevied from (1) show that inventories of money and physical inputs can besubstitutes. Kp and Ks however, are assumed perfect substitutes; subscripts are to account only for theirmeans of purchase. It is assumed that rp > rs and cp ≤ cs. The first inequality arises because primary money is moreuseful than secondary, and thus has a higher opportunity cost. The second arises because, given thisunequal usefulness, items for sale are in practice usually posted at higher prices in WIR than in SFr.,even though these are considered comparable units (Stodder, 2009). Lemma 1: For a cost minimizing firm, the marginal productivity of Ks is at least as great as thatfor Kp, and that of ms is less than mp.

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10 Proof: Using the above inequalities and the constraint in (1), the first order conditions yield(cs/cp) = (∂f/∂Ks)/(∂f/∂Kp) ≥ 1 > (rs /rp) = (∂f/∂ms)/(∂f/∂mp). If smaller Registered clients face more restricted credit conditions than larger Non-Registeredclients (that is, a higher interest rate on primary money, rp), then larger holdings of ms/mp Balances forthese Registered clients are optimal. In the following, consider Registered firms to be of type 1 and theNon-Registered to be type 2: Lemma 2: If firm 1 is more credit constrained than firm 2 for primary currency, J # 2 J $ , thenceteris paribus, firm 1’s holdings of secondary currency will be relatively larger: ˭# 9˭# 2 ˭$ 9˭$ . Proof: The ratio rs /rp will be lower for the credit constrained firm 1, and similarly its marginalproduct of ms compared to mp, by the first order conditions shown in Lemma 1. With the sameproduction/transformation function f( ), firm 1 must hold a larger ratio of secondary to primary currency. Table 3 shows that Registered firms have larger average balances of WIR. Since the averagesize of Registered firms is less than Non-Registered, Lemma 2 seems to be empirically confirmed. Smaller Registered clients (of type 1, in Lemma 2) may be quite limited in their access to creditfor primary currency, even without a recession. And as we have seen in the 2008-2009 recession,smaller firms may loose credit access altogether. Thus it is not unreasonable to suppose that the rise ininterest rates for Non-Registered clients (type 2) may actually be greater than that for smaller Registeredclients (type 1), who may never had good access to begin with. This would lead to a larger increase inWIR Balances for the larger Non-Registered clients (type 2): Lemma 3: If the business cycle brings a larger change in primary currency interest rates for firm2 than for firm 1, J $ 2 J # 4 Ŵ then the increase in holdings of secondary currency will be greaterfor firm 2: ˭$ 2 ˭# 4 Ŵ Proof: Immediate from the previous Lemmas.

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11 These results imply that WIR Balances vary with counter-cyclical activity. Similarly, thedescription of Studer (1988, p. 31) – as well as a simulation trading game by LETS founder MichaelLinton and his associate, Eric Harris-Braun (2007) – show that WIR Balances build (and are built up by)increased reciprocal trade. Thus we should see WIR Balances growing during a recession. We now setout to test these results. III. Econometric Tests Although the relation with GDP is interesting, we should also note the link between Numbers ofUnemployed and WIR activity. Previous estimates (Stodder, 2009) have shown this cyclical indicator tobe even more closely tied to WIR, and there are good reasons why this should be so. Employees in smaller, less diversified firms are more subject to unemployment risk inSwitzerland (Winter-Ebmer and Zweimüller, 1999; Winter-Ebmer, 2001), as in most other countries.Smaller firms also have less access to formal credit institutions (Terra, 2003), and their owners must relydisproportionately on self-financing (Small Business Administration, 1998) and, as we have seen, tradecredits (Nilsen, 2002; Petersen and Rajan, 1997). Vector Error Correction (VEC) models are a natural way of checking both stability and counter-cyclical activity. If all are growing in an expanding economy, then the long-term relationship betweenGDP, the Number of Unemployed, and WIR activity – as shown in the Error Correction (EC) equation –should all be positive. If WIR activity is countercyclical, then the relationship between changes GDP orthe Number of Unemployed on the one hand, and changes in WIR activity and the other – as shown inthe Vector Auto Regression (VAR) portion of the VEC – will be negative or positive, respectively. Thisis a relation between short-term or “cyclical” deviations, as opposed to long-term “secular” growth. Because our time series is fairly short, just 15 years, we are not so concerned about the “long-term” secular relationship – the error-correction portion of the VEC. As long as this relationship is

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12cointegrated, we can concentrate on the coefficients of the lagged, first-differenced values of these terms– the vector portion of the ECM, where any counter-cyclical effects will show up. In Table 4 below, it is seen that the coefficients on first-differenced GDP (highlighted forconvenience) have the expected negative counter-cyclical sign for the Turnover of both Registered andNon-Registered Firms, when lagged two years. Note that the sign on these coefficients is generallypositive but insignificant when the differences are lagged for one period, but negative and significant fora two period lag. For Non-Registered firms, the coefficients on both of Turnover and Balances have theexpected counter-cyclical sign (negative). From the log-log form, these coefficients are in fact the elasticities of the original variables.Thus, the second-year-lagged GDP elasticity of Non-Registered Turnover is of similar magnitude to thatof Non-Registered Balances: -1.4037 and -1.2617 in columns (2) and (4), respectively. Balances (ratherthan Velocity) can thus be seen to drive the counter-cyclical result for Non-Registered firms: theelasticity of Turnover must equal the sum of the Balance and Velocity elasticities. If we test the nullhypothesis that the GDP elasticities of Turnover and Balances are equal in regressions (2) and (4), theWald statistic F-test shows this null can be rejected only at p-values of 0.857 and 0.533, respectively.Thus their elasticities are too close to be statistically distinguished, and we cannot reject the null thatthey may in fact be equal. It is useful to note that strict equality of these elasticities is not needed to prove that the elasticityof Balances, rather than Velocity, drives the behavior of Turnover. All we require is that they be ‘close.’The Elasticity on Turnover (ET) is the sum of elasticities on Balances (EB) and Velocity (EV), ET = EB +EV. Thus if ET minus EB is close to zero, then so is EV. The other regression results in Table 4 are mildly encouraging, with the exception of the p-valueson the Wooldridge (2000) null hypothesis of no first-order auto-regression. This null must be rejected,and there is a likely problem of serial correlation. Things may not be so bad as they seem, however.

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14estimates are unbiased, even though they are not efficient; i.e., do not have standard errors as small aspossible. Thus despite serial correlation, the coefficient estimates below are reasonable approximations,and are likely to be even more significant than they appear. We can be fairly confident about the results. We now compare the results of Table 4 to Table 5 below, where Number of Unemployed is nowthe independent variable. Once again, the two-period-lagged counter-cyclical Unemployment elasticityof Turnover (with a positive counter-cyclical sign) seems driven by the elasticity of Balance, which is ofa similar magnitude. Comparing these elasticity of Registered Firms’ Turnover from the second lag ofUnemployment in regression (1) and the elasticity of their Balances in regression (3), 0.0742 and 0.1163– the null hypothesis of their equality can be rejected only at p-values of 0.2022 and 0.4820,respectively. Turning to the same elasticities for the Non-Registered firms in regressions (2) and (4),0.0991 and 0.0712 – the null hypothesis of their equality can be rejected only at p-values of 0.1991 and0.6597, respectively. Once again, therefore, we see the cyclical behavior of WIR Turnover driven bythe behavior of WIR Balances. Note, however, the counter-cyclical response to Unemployment is clear for both Registered andNon-Registered client firms in Table 5, whereas for GDP in Table 4 it was clear only for the Non-Registered. Why might this be? Recall that smaller firms are more at risk from unemployment (Winter-Ebmer and Zweimüller, 1999; Winter-Ebmer, 2001), and also more subject to credit constraints (Terra,2003; Small Business Administration, 1998). As we have noted, this leads to a greater reliance on tradecredits for such firms (Nilsen, 2002; Petersen and Rajan, 1997). If we are correct that WIR Balancesplay a similar role to trade credits, then it seems likely that smaller, Registered firms may find: a) their effective business cycle more closely tied to Unemployment than to GDP itself, and b) their WIR activity more counter-cyclically tied to Unemployment. This pattern seems supported by these regression results, which show more significant counter-cyclical elasticities for Unemployment in Table 5 than for GDP in Table 4. A similar pattern will also

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174 and 5 are based on panel data, while Table 6 is a simple time series. We now use a LagrangeMultiplier test gauged for the specified number of lags – two in this paper. As opposed to theWooldridge tests shown on the previous panel regressions in Tables 4 and 5, in Table 6 we cannot rejectthe null hypothesis of no serial correlation – thus allowing more confidence in the results. In Table 6, we see that the GDP elasticities of Balances are not only as large as those onTurnover, they are generally a good deal larger. This is more than enough to prove that the elasticitiesof Balances are driving the result. Comparing Average GDP elasticities on Balances in Columns (3) and (4), we see that those forNon-Registered firms in (4) are more than twice as large as those of Registered firms in (3). If Non-Registered firms are significantly more counter-cyclical in their WIR-activity than Registered firms, thissuggests a conjecture. If WIR Balances act similarly to trade credits, then we would expect to see largerNon-Registered firms advancing credit to their best customers by accepting more WIR currency aspayment during recessions. We have already seen, in Table 3, that Velocity tends to be much lower forNon-Registered than Registered firms. If during recessions, the larger Non-Registered firms also tendedto hold such WIR currency for even longer – in an effort to help their smaller suppliers – this couldshow up as larger counter-cyclical Balance variation for these larger firms. The time series in Table 2 shows that WIR activity has been counter-cyclical for almost 60 years.But what factors determine whether a particular industry shows counter-cyclical activity or not? Table 6shows that WIR activity in one industry, Construction, where it has been strongly countercyclical. Thepanel of basic industry types, in Table 4 and 5, shows WIR to be only somewhat counter-cyclical. Rather than test for a particular specification, we test for a family of specifications. Theliterature on non-parametric regressions has grown large in recent years; see Ellison and Ellison (1998)Lee and Ullah (2001). While the goal is usually to test regression specifications, a more preliminarytask is to summarize general specification patterns. Summarizing our results in Table 7, we see that

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19 Table 7 summarizes the results of Vector Error Correction regressions similar to those carriedout in Table 6, but performed on all six basic industrial sectors. Note that each of the cells contains: a) An integer count between 0 and 8: the number of coefficients on Unemployment or GDP that were significant at the 10 percent level. (The highest possible value is 8, since there are 4 regressions for each pair of variables, each with 2 lagged terms.) b) The average value of these significant coefficients. c) A striped pattern for counter-cyclical effects, with flat shading for pro-cyclical, and darkness of the colors proportional to the number of significant variables. Results in Table 7 are further characterized as “Counter” our “Pro” cyclical, according towhether the coefficient’s sign on GDP is negative or positive, or one on Unemployment is positive ornegative, respectively. While Construction is strongly counter-cyclical, Retail, Services, and Wholesaletrade are all weakly so – although again we see a counter-cyclical pattern more clearly fromUnemployment than GDP. WIR activity in some sectors, like Hospitality, appears pro-cyclical. Table 7 summarizes regressions on 6 industries, each with 2 sorts of clients (Registered and Non-Registered), 4 different pairings of dependent (Balance or Turnover) and independent (GDP orUnemployed) variables, 4 different specifications, each with 2 coefficients of interest – a total of 192regressions and 384 coefficients. The specifications are a regression on: (a) two single year realizationsof the independent variable or two moving 2-year averages of the same, and (b) with or without a timetrend. Thus there are 4 possible specifications for each dependent/independent variable pair, each with 2timed observations of the independent variable: a total of 8 coefficients for each regression pair ofdependent and independent variable. The regression results summarized Table 7 show several statistically significant patterns, as seenin the following contingency tables: 1) Unemployment shows stronger counter-cyclical WIR activity than does GDP:

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20 Table 8: Significant Cyclical Elasticities from Unemployment and GDP Counter- Pro- Non- Cyclical Cyclical Significant Sums: GDP Elasticity 26 33 133 192 Unemployment Elasticity 36 20 136 192 Sums: 62 53 269 384 Chi-Squared Statistic: 4.8350 p-value: 0.0891 Q-Statistic: 4.8749 p-value: 0.0874 Table 8 shows more non-significant coefficients than those showing a significant cyclical patternof any kind. But recall from the time series in Table 3 and the panels in Tables 4 and 5 that the overallpattern on GDP and Unemployment is counter-cyclical. (This is driven by values of different industries,and not just numbers of industries.) Note also that change in the number of unemployed, a laggingbusiness cycle indicator, shows more significant counter-cyclical coefficients than does change in GDP.This is consistent with the argument that WIR’s initial counter-cyclical response is from smallerRegistered firms – more sensitive to Unemployment risk than larger Non-Registered firms. But we seenNon-Registered firms as also be affected, since they agree to accept more WIR transactions from theirsmall-business customers and distributors. 2) Non-Registered Firms show more significant cyclical effects – both counter- and pro-cyclical – than do Registered Firms: Table 9: Significant Cyclical Coefficients in Registered and Non-Registered Firms Counter- Pro- Non- Cyclical Cyclical Significant Sums: Registered 25 13 154 192 Non-Registered 37 40 115 192 Sums: 62 53 269 384 Chi-Squared Statistic: 21.7316 p-value: 1.9101 E-05 Q-Statistic: 22.4333 p-value: 1.3449 E-05Our previous panel regressions showed Non-Registered firms more counter-cyclical than Registered,and Table 9 shows that Non-Registered firms also have a far greater number of significant cyclicalcoefficients, with a slight preponderance of the pro-cyclical.

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22The closeness of the fit of Balances regressed on Turnover is impressive, an R-squared of 84. Onceagain we have the implication, previously supported by Wald tests on the regressions in Tables 4 and 5,that Balances and not Velocities drive the counter-cyclical activity of Turnover. If, as the regression inTable 11 indicates, Balances have a counter-cyclical elasticity that is greater than that of Turnover, thenthe corresponding Velocity elasticities must be of the opposite sign from those on Turnover; i.e., theymust actually be pro-cyclical – though not so much as to be fully offsetting.IV. Conclusions and Discussion Rather than de-stabilizing to the larger economy, as many of the world’s largest banks haverecently shown themselves, WIR-Bank seems to be stabilizing, especially in providing credit for smallbusinesses. This counter-cyclical pattern is evident in almost 60 years of WIR data. If that stabilizationis due to an ability to create new Balances autonomously – from the counter-cyclical flow of reciprocaltrade itself, rather than deliberate bank policy – then the WIR-bank is deserving of further study. Petersen and Rajan (1997) estimate that the total volume of trade credits for large US companies,their accounts payable and receivable, are one-third of their total assets. Like trade credits, WIR are alifeline for firms most likely to be credit-rationed in a recession – SME (Nilsen, 2002). It is clear fromTable 3 that WIR is a highly important part of the credit picture for SME in Switzerland, and also forsome large Non-Registered companies. Is this institution peculiarly Swiss? After all, the WIR-Bank has no foreign branches.Nevertheless, the best evidence for this type of network’s international viability may be its very “pan-Swiss” nature. That is, the WIR does not exist solely in one language-region, unlike many other Swisscooperatives (Ostrom, 1990). It has long had German, French, and Italian-speaking sections andmemberships in rough proportion to their separate Swiss populations (WIR Rapport de Gestion, variousissues). This suggests similar institutions could work in different countries.

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23 What about the inflationary potential of such a network? There is a considerable literature(Mankiw, 1993; Mankiw and Summers, 1986; Bernanke and Gertler, 1995; Gavin and Kydland, 1999)showing that the broad money supply is pro-cyclical. Even less controversial is the finding that thevelocity of money is highly pro-cyclical (Tobin, 1970; Goldberg and Thurston, 1977; Leão 2005). TheVEC models of Stodder (2009), by contrast, show that WIR Turnover and the ordinary Swiss moneysupply vary inversely over the short term. Two points seem worth making here. First, and perhaps most obviously: if WIR Turnover iscounter-cyclical while ordinary currency is pro-cyclical, then an increase in WIR should be lessinflationary than a comparable increase in the national currency.7 Second, as Studer (1998) argues, the growth of the WIR money supply is autonomous and self-balancing. This automatic net balancing of WIR Balances – where new credits are matched by newdebits – allows short-term fluctuations in real output to be matched by Balances. This allows for (butdoes not force) price stability. In terms of the quantity of money equation, Turnover ɬ Balances xVelocity ɬ P x Y. If Velocity is unchanged, then a proportional change in Balances will be matched byan equivalent change in Turnover – as is consistent with the Wald tests on the panel regressions inTables 4 and 5. If this change in Balances is also equal to that in Y (goods and services), then thechange in P (price) will of course be zero.8 WIR activity may ‘leverage’ a great deal more economic activity than its small size wouldsuggest. Data for 2007 show total WIR Balances (612 million in SFr) are one-quarter of one percent ofthe Swiss money supply, M1 (IMF, 2009). This seems trivial, until one considers: • The remarkable penetration of WIR into many small businesses (Table 4); e.g., 37 percent of all Swiss construction firms.7 Our earlier estimates (Stodder 2009) show that WIR are most likely to be accepted when ordinary (pro-cyclical)currency is in short supply. Thus, WIR Turnover is likely to concentrate most where its inflationary potential is the least.8 The BV = PY identity would, of course, only be strictly true within a closed WIR-type system. In fact, WIRcoexists with SFr. as a secondary or “residual” currency.

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24 • Nearly twice as many Non-Registered as Registered firms (Table 3), including, as WIR statistician Winkler (2010) notes, some that are large and well-known. The WIR activity of the larger Non-Registered firms may itself not be so widely-known, because of its, ‘trade credit,’ business-to-business, and largely non-advertised nature. (WIR publication advertisements are primarily for Registered members.) • These Non-Registered companies, if larger, should show a higher ‘leverage’ of SFr to WIR, as implied by Table 3 and predicted by Lemma 2. • Our empirical findings that non-Registered companies behave more counter-cyclically in their WIR accounts than do Registered firms. These combined effects show Non-Registered firms with greater numbers, larger average firmsize, greater leveraging, and greater counter-cyclical activity (Tables 3-9) than their Registeredcounterparts. This means that WIR activity is a more potent a counter-cyclical force than one wouldguess from its small balances. Without knowing the normal currency expenditures of Non-RegisteredWIR clients, we cannot calculate the size of the ‘multiplier’ for new WIR spending during a recession.But as Bernard Lietaer has noted (personal communication, 2009), these combined effects mean that it iscertain to be larger than the conventional Keynesian multiplier.ReferencesAllais, M. (1947) Economie et Intérèt, Paris: Librarie de Editions OfficiellesArellano, M. (1987) "Computing Robust Standard Errors for Within-groups Estimators," Oxford Bulletin of Economics and Statistics, Vol. 49, pp. 431-434.Berlin, M., 2003. Trade credit: why do production firms act as financial intermediaries? Federal Reserve Bank of Philadelphia, Business Review, 3rd Quarter, 21-28.